Stocks climb for 3rd straight day after Fed’s preferred inflation gauge eases to 2-year low

What’s driving markets

U.S. stocks shot higher at the open while Treasury yields retreated after a reading on core inflation from the PCE price index rose a scant 0.1% in August, a smaller increase than the 0.2% economists had expected.

That pushed the year-over-year increase for core prices, which excludes volatile food and energy prices, up just 3.9% year-over-year, the slowest 12-month pace in two years. The Fed favors the core inflation rate because it sees the data as better indicators of long-term inflation trends.

However, the impact of rising energy prices was felt in the headline PCE index, which rose a sharp 0.4% in August, the biggest increase in seven months.

As investors cheered the PCE report, investing professionals pointed out that it likely wouldn’t stop the Fed from delivering one more interest-rate hike later this year. Stocks have fallen since the Fed revealed earlier this month that it plans to keep its policy rate north of 5% for longer than investors had previously expected.

“Friday’s PCE on a core basis, which removes food and energy prices, suggests that inflation is continuing to decelerate, meaning the Fed’s aggressive campaign is working,” Carol Schleif, chief investment officer at BMO Family Office, said in emailed commentary. “The challenge is that core PCE remains almost double the Fed’s 2% target, prompting the Fed to keep the possibility of another rate hike in play.”

Callie Cox, U.S. investment strategist at eToro, highlighted the decline in services inflation, which was up 4.9% in August from 12 months earlier.

“Services inflation is cooling off, too, which is what Powell and the Fed want to see as they near the end of rate hikes. Altogether, this report should bring bond yields back down to earth,” she said in emailed commentary.

Besides inflation, the report also showed personal income rising 0.4%. That was driven by increases in private wages and salaries, but it also reflects higher interest income.

Investors also received an update from the Chicago Business Barometer, also known as the Chicago PMI, which registered at 44.1 in September, its first decline in three months. A reading from the University of Michigan consumer sentiment index showed sentiment improved slightly at the end of September, with the final reading of the sentiment survey rising to 68.1 from 67.7 earlier in the month.

Though the S&P 500 is climbing for its third straight day, it’s set to end the month with a loss of around 5%, as long-term bond yields and the U.S. dollar have climbed, heaping pressure on stocks. However, the S&P 500 and Nasdaq are now on track to score weekly gains, snapping a three-week losing streak, according to FactSet data.

The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
was off by 4 basis points to 4.530% in recent trade, although it remained near 16-year highs reached earlier this week. Bond yields move inversely to prices.

Stocks to watch

• Shares of Nike Inc. NKE, a component of the Dow Jones Industrial Average, rallied as the apparel maker reported better-than-forecast earnings.

• Nike’s rivals, Adidas AG
  ADS,
  +6.41%
  and Puma SE
  PUM,
  +6.12%,
  saw their shares rise during early European markets action, after their U.S. peer beat first-quarter earnings forecasts.

• Shares of Fisker Inc.
  FSR,
  +0.39%
  were knocked lower after the electric vehicle maker announced intentions to offer additional convertible debt to an existing institutional investor.

• Blue Apron Holdings Inc.’s
  APRN,
  +133.42%
  stock soared following the announcement of a deal that will see the company become acquired by a food-delivery startup. The deal will see the company exit public markets at a fraction of the valuation it fetched at its IPO.